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What does Brexit mean for UK franchising? - part one

2016 was a year of change. The ripples of these changes will continue for years to come, as the UK navigates its way through the process of triggering Article 50 and its exit of the EU.

There are a number of key considerations franchisors and franchisees need to assess over this period.

That's not to say that businesses should make rash or knee jerk decisions, because the real impact of the Brexit vote is yet to be seen. As such, from a legal perspective, there is not likely to be upheaval for a few years yet. However, part one and part two of this article consider the material issues initiated by Brexit, as we see them today, which could impact a franchise business.

Day to day - currency and supply chain

To date, Brexit has already had a noticeable impact on costs given that the value of the pound has plummeted. As such, franchise businesses continue to see their cost base increase. In the short term, franchise businesses therefore need to assess if they can pass these costs on and/or whether this will filter through to the end customer. Temporary relief and longer term commercial arrangements should then be reflected. For example, can price adjustment mechanisms be triggered; can any of these arrangements be terminated/renegotiated?

For the medium term, flexibility through this period of uncertainty could be valuable, especially as it remains unclear what trade barriers or importing/exporting duties could be applied in the future. Financial planning is imperative to provide for agility to adapt to any relevant changes which may impact franchise businesses.

Transparency of such planning is key, for example, when engaging with prospective franchisees, franchise businesses need to keep in mind the need to avoid misrepresentation. This is even more important, given the Brexit vote, as the impact on franchise funding opportunities is unclear. Although we note that as the time of writing this, franchise lenders such as HSBC, Lloyds, RBS and NatWest have asserted that Brexit will not impact adversely on their lending decision making.

Enforcing your franchise agreement - dispute resolution and territory

Franchise businesses should consider if Brexit may trigger termination of its franchise agreement for example, by virtue of material adverse change or force majeure. As such, in due course, franchisors should audit their contracts to fully assess the impact of Brexit on its portfolio, if any.

Depending on the drafting of the relevant franchise agreement, it may grant rights throughout the EU. When the UK leaves the EU, it could have the (probably unintended) effect of removing the UK from the scope of the agreement. Not only this, franchise businesses operating in more than one jurisdiction should be mindful of the future landscape for cross-border enforcement of judgments in the EU and UK. As legislation governing this area originates from the EU, the UK will need to re-consider the options available to it for example, entering into bilateral/multi-lateral agreements with other countries.

Brand and know how are important to franchise businesses, however the effect of Brexit for brand owners is unknown at this time and it is unclear whether or not current rights will exist post-Brexit.

There is uncertainty for businesses who own EU trade marks (EUTMs) (formerly known as Community trade marks), which may no longer be applicable in the EU or to UK-based owners following Brexit. Businesses that are considering new trade mark applications should consider whether filing for an EUTM is really necessary, or whether a UK registration is actually sufficient.

The EU's recent implementation of a new trade secrets Directive may cause concern for franchisors, however the impact of Brexit on trade secrets is likely to be minimal as the UK's current standards are largely the same as the EU's.

Operations manuals/handbooks, logos, unregistered trade marks, databases and software constitute valuable rights of any franchisor. The protection of such material, via copyright and cross-border intellectual property protection against infringers, is largely aligned across the EU, but the influence of Brexit on such rights and/or protection is uncertain.

Despite the uncertainty, franchisors can be proactive by carrying out health checks of their IP portfolios to ensure that they are in a strong position should changes be made. Franchisors should also ensure their NDA/confidentiality agreements and provisions are reviewed such that they provide sufficient protection for their model.

For further consideration of the material issues initiated by Brexit, which could impact franchise businesses, please see our next article 'What does Brexit mean for UK franchising? - part two'.

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